Generally Accepted Accounting Principles and Fob Destination

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There are two possible FOB contract structures mentioned in the case, namely FOB shipping point and FOB destination. FOB shipping point means that Biovail would have recognized the revenue the same day it shipped as the sales arrangement was satisfied, service rendered, and a determinable sales price established. Conversely, FOB destination would not have allowed Biovail to recognize the revenue until the shipment reached the distributer. In such a contract service is not rendered and, therefore, revenues are not earned until shipment arrival. Based on this case, the company should recognize revenue via FOB shipping point as “The agreement between Biovail and the Distributer provided that title to, and risk of loss with respect to, the product would not have passed to the Distributer until the product was delivered to the Distributer’s facility. In this scenario, using generally accepted accounting principles (GAAP) requirements, revenue cannot be recognized as the seller has not done everything required under the sales agreement. In this specific sales agreement, title and risk of the shipment remains the seller’s until received by the buyer. Therefore, Biovail is liable for shipping incidents. It is also important to note here that Biovail’s stock is listed on the NYSE and must abide by U.S. GAAP. While GAAP is not law and does allow for corporate discretion, Biovail’s aggressive accounting practices should give rise to concern. While GAAP does allow firms flexibility in certain areas (e.g. estimations regarding time and future costs), Biovail would venture outside of this flexibility and violate GAAP if it were to deliberately recognize revenues contracted under FOB destination as soon as the shipment left its docks. In this case, it would incorrectly affect such reports as revenues and earnings per share for the third and fourth quarters. •Effect on Stated Revenues

FOB shipping point would have allowed...